18 Guarantees, commitments and risks

Guarantees, commitments and risks of €3,384 million (€4,630 million at 31 December 2014) comprise:

Guarantees

Other personal guarantees issued in the interest of subsidiaries (€127 million) refer mainly to hold-harmless letters issued in favour of third parties for participation in tenders and concessions relating to the natural gas distribution service (€70 million) and performance bonds (€52 million).

Commitments

At 30 June 2015, commitments with suppliers for the purchase of assets under construction totalled €1,526 million (€1,512 million at 31 December 2014).

Other commitments (€10 million; €57 million at 31 December 2014) relate mainly to future minimum payments for non-cancellable operating leases (€8 million, including €3 million maturing within the next year and €5 million between one and five years).

With reference to TAG GmbH, the contractual agreements drawn up between Snam, TAG and Gas Connect Austria GmbH (GCA) stipulate that if TAG is not capable of self-financing, the other companies must finance it according to the equity investment held.

Risks

Risks related to third-party assets on deposit, equal to €1,628 million (€2,613 million at 31 December 2014) relate to approximately 5.8 billion cubic metres of natural gas deposited in the storage plants by customers of the service. This amount was determined by valuing the deposited gas quantities at the average stock cost of approximately €0.28 per standard cubic metre (€0.32 at 31 December 2014).

Risks related to compensation and litigation of €93 million (€314 million at 31 December 2014) relate to possible (but not probable) claims for compensation arising from ongoing litigation, with a low probability that the pertinent economic risk will arise.

FINANCIAL RISK MANAGEMENT

The management and monitoring policies for key risk factors are described in the “Elements of risk and uncertainty” section of the interim directors’ report.

Market value of financial instruments

Below is the classification of financial assets and liabilities measured at fair value in the statement of financial position in accordance with the fair value hierarchy defined on the basis of the significance of the inputs used in the measurement process. More specifically, in accordance with the characteristics of the inputs used for measurement, the fair value hierarchy comprises the following levels:

a) level 1: prices quoted (and not amended) on active markets for the same financial assets or liabilities;

b) level 2: measurements made on the basis of inputs differing from the quoted prices referred to in the previous point, which, for the assets/liabilities submitted for measurement, are directly (prices) or indirectly (price derivatives) observable;

c) level 3: inputs not based on observable market data.

With regard to the above, the classification of financial assets and liabilities measured at fair value in the statement of financial position, according to the fair value hierarchy, concerned derivative financial instruments at 30 June 2015 classified at level 2 and registered in Note 13 “Other current and non-current liabilities” (€8 million).

Disputes and other measures

Snam is involved in civil, administrative and criminal cases and legal actions related to its normal business activities. According to the information currently available and considering the existing risks, Snam believes that these proceedings and actions will not have material adverse effects on its consolidated financial statements. The following is a summary of the most important proceedings for which significant changes to the situation reported in the 2014 annual report occurred, including new and closed proceedings.

Criminal cases

Snam Rete Gas S.p.A. – Genoa event

The public prosecutor at the Court of Genoa has initiated criminal proceedings against unknown persons in relation to an incident that occurred on 20 March 2014 in the municipality of Serra Riccò (GE). Specifically, the matter concerns a gas leak from a section of the “Derivazione per Recco” natural gas pipeline. The pipeline section concerned has been seized.

The public prosecutor filed a request for dismissal.

The company is actively cooperating with the judicial authorities.

Snam Rete Gas S.p.A. – Ravenna event

On 10 December 2014, at the “Nodo di Ravenna” site owned by Snam Rete Gas, which sorts and distributes natural gas within the region, a fire broke out involving one of the gas preheating plants. On the same date, the public prosecutor sequestered the area in order to ascertain the causes of the fire.

The technical survey, carried out immediately after the incident by Snam Rete Gas technicians, showed that the tightening bolts on one of the two connecting flanges of the heater were missing. A complaint was subsequently filed with the public prosecutor at the Court of Ravenna.

The public prosecutor subsequently issued a notice of non-recurrent technical assessments, resulting in the inclusion of certain executives and managers on the register of persons under investigation. On 15 January 2015, the public prosecutor ordered the release from sequestration of the area. Snam Rete Gas is actively cooperating with the judicial authorities.

Italgas S.p.A. – Barletta event

On 25 April 2015, an explosion occurred due to a gas leak, killing one Italgas worker and injuring others, during an operation following a report of damage to the gas network by a third party resulting in leakage of gas. The competent public prosecutor has launched an investigation, with which the company is actively cooperating.

Electricity, Gas and Water Authority (the Authority)

Snam Rete Gas S.p.A. – Investigation into violations concerning natural gas metering with regard to Snam Rete Gas S.p.A. and request for information

Through Resolution VIS 97/11, notified on 15 November 2011, the Electricity, Gas and Water Authority (the Authority) started proceedings to look into whether there were any violations concerning natural gas metering, relating to alleged irregularities in gas metering with reference to 45 plants.

Through its subsequent Resolution 431/2012/S/gas of 25 October 2012, the Authority opened further proceedings to determine whether there had been violations concerning natural gas metering, simultaneously joining with the aforementioned investigative proceedings.

Snam Rete Gas S.p.A. has submitted proposals in relation to the alleged conduct, as well as an update on the situation at the regulating and metering facilities in question. By means of Resolution 332/2015/S/gas of 9 July 2015, the Authority declared the proposals to be inadmissible, on the grounds that they would not be adequate to restore the alignment of interests existing before the alleged violations or to eliminate any immediate and direct consequences of these violations.

Snam Rete Gas S.p.A. – Investigation into violation of the regulation on availability of natural gas higher heating value measurements

As a result of the formal investigation opened by Resolution VIS 85/09, the Authority, by way of Resolution VIS 12/11, issued a fine of €580,000 against Snam Rete Gas S.p.A. for violating the rules imposed on gas transportation companies with respect to the proper measurement and use of natural gas higher heating values (hereinafter “HHV”). That parameter is needed to determine the actual energy provided to operators on the market or individual sellers.

The Authority saw fit to penalise temporary interruption, in limited cases, of the mechanical and chemical reading of the HHV. The Authority also found that the violation did not involve any billing infraction and, when determining the amount of the fine, it took into consideration the corrective actions taken by Snam Rete Gas to improve the measurement service and to avoid similar negative reflections on its operations in the future.

As well as paying the fine, Snam has appealed to the courts to have the order reviewed. By means of a ruling of 2 July 2015, the Lombardy Regional Administrative Court rejected the appeal, on the grounds that the offence was one of conduct only and that the fine imposed was commensurate with the Authority’s categorisation of the offence as “non-serious”.

Snam Rete Gas S.p.A. – Resolution 145/2013/R/gas – Proceedings to determine the share of costs arising from outstanding receivables owing to the gas balancing supervisor

By way of Resolution 145/2013/R/gas of 5 April 2013, the Authority began “proceedings to determine the share of costs arising from outstanding receivables owing to the gas balancing supervisor for the period 1 December 2011 - 23 October 2012”.

The proceedings in question arose from the findings of the exploratory investigation, opened by way of Resolution 282/2012/R/gas, into the methods for regulating the economic aspects of balancing and the steps taken to protect the system relating to the period 1 December 2011 - 31 May 2012. By way of Resolution 444/2012/R/gas, the Authority extended the period under review for the exploratory investigation up to 23 October 2012. Through Resolution 351/2012/R/gas, the Authority also identified measures to manage the costs declared by Snam Rete Gas S.p.A., determining the share of costs owing to the Balancing Supervisor on the basis of the outcome of the exploratory investigation.

This investigation was concluded by way of Resolution 144/2013/E/gas, and the Authority used Resolution 145/2013/R/gas to rule that dedicated proceedings should be opened to determine the share of the costs owing to Snam Rete Gas S.p.A. with regard to “fully outstanding receivables” and to monitor the situation going forward.

The results of the investigation were notified on 6 August 2014, with the finding that there were no grounds for recognition of the disputed charges. On 20 April 2015, the final hearing took place before the body overseeing the proceedings. A ruling by the Authority is pending.

The company had made an allocation to the provision for risks in 2014.

Italgas S.p.A. – Investigation into gas distribution service quality violations

On 18 September 2009, by way of Resolution VIS 92/09, the Authority opened a formal investigation into alleged breaches regarding gas distribution service quality. Specifically, the alleged breach, on the part of the distributors operating networks with cast-iron pipes featuring hemp- and lead-sealed joints (not yet reconditioned), consisted of the failure to replace, renew or decommission a minimum of 30% of said networks by 31 December 2008.

On completion of the investigation, Resolution VIS 41/11 of 24 March 2011 of the Authority: (i) confirmed that Italgas had complied with its replacement obligation across Italy; and (ii) found that the company was liable for failing to comply with said obligation in relation only to the distribution network in Venice, and imposed a fine of €51,000.

Italgas believes it was justified in not complying with the obligation in relation to the Venice network. It has made provision for payment of the fine subject to an appeal, which was submitted to the Lombardy Regional Administrative Court in Milan. By means of a ruling of 13 July 2015, the Regional Administrative Court rejected the appeal, on the grounds that difficulties associated with the specific features of the sites were enough to reduce but not completely exclude the liability of the appellant, and that the authorities would have taken these features into account in assessing the Venice situation and determining the amount of the fine.

Italgas S.p.A. – Gas distribution service violations relating to the billing of the “municipal fees” tariff component

By means of Resolution 104/2015/S/gas of 12 March 2015, the Authority began enforcement proceedings for violations relating to the billing of the “COLci” component.

The Authority specifically alleges that the billing procedures for this component stipulated under current regulations have not been complied with.

The duration of the investigation has been set at 180 days, while the deadline for the adoption of the provision is 90 days from the closing date of the investigation.

On 23 April 2015, the Authority requested the transmission of billing data for the COLci tariff component for the years 2009-2013, which the company provided.

Other provisions

Judicial administration of the subsidiary Italgas – Court of Palermo

On 11 July 2014, the Court of Palermo notified the subsidiary Italgas of a preventative measure of judicial administration, pursuant to Article 34, paragraph 2 of Legislative Decree 159/2011 (“Anti-mafia code and prevention measures, as well as new measures relating to anti-mafia documentation in accordance with Articles 1 and 2 of Law 136 of 13 August 2010”). Pursuant to the law, this measure protects the capital structure of Italgas from infiltration and/or collusion.

This is a temporary measure with a fixed maximum duration, which in this case is six months and may be extended by no more than six months pursuant to Legislative Decree 159/2011. As a result, the powers of administration for the economic and business activities and assets of Italgas have been assigned to a collective administrative body comprising four court-appointed members. The Italgas Board of Directors is suspended for the duration of the measure. Snam retains full ownership of the entire share capital of Italgas and all related rights.

For the purposes of the accounting principles adopted when drawing up the 2014 half-year report, it should be pointed out that Italgas had been notified of the measure on 11 July 2014, after the end of the first half-year and prior to the approval of the report. Furthermore, for the purposes of the Group’s consolidated financial statements, the collective administrative body had authorised the transmission to Snam of the Italgas half-year report at 30 June 2014, together with the relevant management certifications involved in the Group procedures in place and subject to prior examination by the Italgas Board of Statutory Auditors. Therefore, in light of the control it exercised over Italgas for the entire first half of 2014 and the full availability of the company’s information flows as at 30 June 2014, in accordance with the provisions of IFRS 10 – “Consolidated Financial Statements”, Snam had retained the procedures used for consolidating the subsidiary within the Group.

At the same time, Consob had informed the company that it was investigating the possible effects of the Italgas matter on the accounting methods used in relation to the subsidiary in the reports pertaining to the period of the preventative measure.

Subsequently, with an order issued on 2 October 2014, the presiding judge gave a clearer definition of the scope of the judicial administration and the activities of the administrative body (hereinafter the “Order”). The Order specifies that the objectives of the judicial administration measure of which Italgas was notified are primarily related to inspection and focus on activities that may reveal whether there are indications of potential infiltration, with a view to taking the necessary steps. Based on this purpose and taking into account, in the case in question, that no action is being taken on the block of shares of the subsidiary and the fact that the preventive measure is a short-term, temporary measure, the Order states that there are no legal, operational or procedural grounds to call into question the parent company’s powers, compliance with the Group’s objectives and strategies, or observance of corporate procedures.

Confirming this, with regard to the activities of the administrative body, the Order also states that, without prejudice to compliance with the provisions of law, this more clearly defined scope and the specific instructions given to the judicial administrators are based on the following principles and activities:

1. The continuation by Italgas along the strategic lines defined in its previously adopted Business Plan and Budget, which, in line with the Snam Group’s sustainability, confirm Italgas’s position as a leading operator in the Italian natural gas distribution business;
2. The maintenance of the cash pooling services performed by Snam to cover Italgas’s financial requirements by accessing the financial markets, in line with the objectives approved in the Business Plan;
3. The maintenance of the services provided centrally by the Snam Group for Italgas, in line with and without prejudice to the contracts in place and the powers granted (with the sole exception of limitations to some powers of attorney that have already been provided for);
4. The maintenance of Italgas within the scope of consolidation of the Snam Group for the purposes of the national tax consolidation scheme, since the conditions provided for by the relevant regulations have been fulfilled;
5. The availability to Snam of Italgas information flows in order to draw up periodic Group consolidated financial reporting, including a statement from the Italgas management to Snam and to the independent auditors, in continuation of current procedures (in order to avoid comments from the independent auditors);
6. The sharing and continuation by Italgas of obligations relating to Snam’s reporting control system pursuant to Law 262/2005 (in line with the steps already taken to maintain the Corporate Reporting Internal Control System);
7. Continuity in relations between the control bodies of Snam and Italgas: continuity in carrying out the duties and meetings of the control and supervisory bodies of Italgas, without prejudice to any appropriate and necessary involvement with the judicial administration body in relation to the requirements of the preventative measure;
8. Continuity in executing the Group’s Annual Audit Schedule, which consists of the steps taken by the Group Internal Audit department in relation to Italgas’s activities (as already carried out pursuant to the strategy of not introducing any amendments or delays to the annual schedule);
9. Continuity in relation to the body of Group procedures adopted by Italgas and the related interaction with Snam departments and management (including the “Extraordinary Transactions” procedure).

In light of the above, and in view of the scope of the judicial administration, the Order concluded that there were no obstacles to the consolidation of the Italgas S.p.A. financial statements within the Snam Group, without prejudice to the subsidiary retaining full independence and responsibility with regard to the adoption of decisions under its sole competency.

Snam has continued to work closely with the judicial authorities and the administrative body. Within this context, and partly in the interests of Italgas, Snam has appointed a leading specialised international company to conduct a thorough independent investigation aimed at:

• reconstructing the circumstantial framework outlined in the Decree, particularly with regard to Italgas’s relations with the counterparties mentioned in the Decree and to the control system in force at the time;
• assessing the overall stability of the current risk management and internal control system, particularly with regard to the risk of infiltration and facilitation of organised crime in tenders.

Following its technical work pertaining to accounts and records and to the internal control system, the appointed company drew the following conclusions, in summary: (i) the supply relations with the counterparties mentioned in the Decree accounted for less than 1% of Italgas’s total cumulative expenditure (and 0.16% of the Snam Group’s total expenditure) between 2009 and 2014; (ii) the current risk management and internal control system appears to be effective and suitable for the purpose of identifying, preventing or minimising the corporate operational risk of infiltration/facilitation of organised crime in business and economic activities. The findings of the thorough independent investigation have been submitted to the judicial authorities.

For the purposes of the interim directors’ report at 30 September 2014, and taking into account the considerations set out in the Order, Italgas S.p.A. remained within the Group’s scope of consolidation.

At the end of the six-month period, the Court extended the preventative measure for an additional six months, as provided for by Legislative Decree 159/2011. At the same time, the Court ordered the administrative body to draw up a programme of measures aimed at concluding the activities, including in relation to the findings of said body. On 8 January 2015, the presiding judge issued an order confirming authorisation for Italgas to be included in the Group’s consolidated financial statements, and ruled that the programme of measures should be drawn up taking into account Snam’s proposals and the staging of a technical round table.

With regard to the identification of the scope of consolidation for the purpose of the 2014 annual report, Snam obtained two opinions from leading independent experts, which confirmed that Italgas should be included in the Group’s scope of consolidation.

Based on the above considerations, and taking into account the opinions obtained, the fact that the events of recent months confirm the continuity of Snam’s single management structure and the full availability of Italgas’s information flow regarding the 2014 financial statements, which were approved by the judicial authorities, supported by accompanying statements and subject to prior assessment by the Italgas Board of Statutory Auditors, Snam opted to keep Italgas and its subsidiaries within the Group’s scope of consolidation, in line with the accounting principles adopted for the financial documents published in 2014.

The activities relating to the revocation of the judicial administration order imposed on Italgas by the Court of Palermo were completed on 9 July 2015. In view of the outcome of the checks performed and the active cooperation of the Snam Group, the Court ordered the handover of the company on 29 June 2015. The revocation refers, among other things, to the sharing of an organisational and procedural plan as well as a plan to monitor and verify the activities of Italgas S.p. A, achieved through the aforementioned technical round table.

Having acknowledged the revocation of the judicial administration order, on 9 July 2015 the Italgas Shareholders’ Meeting reappointed all members of the Board of Directors, the term of which expires at the Shareholders’ Meeting called to approve the financial statements for the year ended 31 December 2015.

Italgas will comply with the obligation to provide the competent authorities with the information required pursuant to Article 34, paragraph 8 of Legislative Decree 159/2011 (judicial control), in relation to the relevant transactions, but it has appealed before the Palermo Court of Appeal against the provision of such information. Italgas S.p.A. will also provide the competent authorities with the results of the periodic reports by the Supervisory Body.

The company has continually kept Consob informed of the progress of the measure and subsequent orders up to the revocation, as well as giving it advance notice of the accounting principles adopted.